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Get Off Google Crack

One of the issues that bothers many consumer facing Internet companies is the reliance on third party distribution.  The issue of business model interdependence is an important one.  In fact, every big company or startup wrestles with this issue and is actively wrestling with it.  The issue usually boils down to a company that is relying too much on a distribution channel where one party is benefiting more than another party in terms of percentage of revenue.  To be blunt, often times we're talking about inorganic ad buys on Google (aka Adwords).

Sometimes the actors in this environment decide to test the waters by turning off this interdependence.  eBay famously did this over a year ago to publicly send a message to Google that their Google Checkout initiative was too core to PayPal to be ignored.  But, typically you see that the actors involved cannot turn off Google Adwords crack without a strategy.  Why?  Inorganic search guys are immediate and can be made to be cost effective.  If you are a public company trying to make a quarter, then why not accelerate some marketing spending (assuming that its efficient spend).  This is a situation that many companies find themselves in. 

In a world where your company only influences 1% of Google's revenue yet you rely on 10%+ of your revenue from Google (Adwords not organic/SEO traffic) then you could have a real problem.  The problem being what happens when you become strategically important to a Google initiative and you are then effectively turned off.  In fact, in the shopping space you see many of the comparison shopping engines who are largely SEM-driven dealing with this issue .  The issue being that at some point Google is better off by-passing the intermediary and going direct to the merchant.  I have seen this story before at Expedia.  Expedia spent a bunch of time thinking thru this issue and building different distribution so that the reliance was lower on Google

There is an argument that the more scale advantage that you have enables  you to price out the competitors in the space and effectively price out  the other potential bidders in the Google marketplace.  You have to be really big though in order to both spend large sums of money as well as to make less gross margin on this traffic over time.  Without having anyone's specific numbers, lets continue with the shopping category analogy and we think that only the largest players in the e-commerce space have balance sheet advantage over time to price other competitors out of the space. 

Using some guesstimates, lets assume that 25% of Amazon's traffic comes from Google Adwords.  According to Comscore, Amazon has 62.7M unique visitors/month.  25% of 62.7M is 15.675 monthly uniques from AdWords.  Again not knowing the click/unique ratio or the average CPC amounts lets use .5 for the click/unique ratio over each month at an average CPC of $.50 then Amazon is spending $3.92M per month on Adwords.  95% of Google's business is Adwords.  Looking at the business by vertical, the retail segment represents approximately 40% of their revenue with finance (20%), travel (15%), CPG (10%) Healthcare (5%), etc.  Of the $21.8 billion (2008) in revenue, almost $9 billion is in the retail space for Google.  In 2008 the US ecommerce space was around $150 billion with 40% of the market driven by search (with Google as the clear market leader).  Amazon is not a large enough Adwords customer to threaten Google from a revenue perspective.  Let’s call it $48M in revenue to Google.  My internal estimates are that Google most likely has a couple of percentage points of reliance on Amazon with Amazon at 10-15% reliance on Google. 

Without knowing the inside baseball on the marketing efficiency, there is most likely some level of efficiency (especially in this market) that Amazon can manage to where they can outspend the thousands of other retailers and in particular the larger big box retailers.  I still think the question remains that long-term what if the economics started to change where you were in a position to lose share from this channel.  Again, Google could most likely make up the 1% loss in revenue somewhere else.

There are all forms of distribution crack that you can addicted to.  I wrote a post awhile ago about not getting addicted to Facebook if you were  a company looking to solely leverage that platform for distribution.  There are many, many other examples of this.  Whether you are large or small, thinking about how you can build direct traffic relationships with sources of supply that you can control or own are typically the best way to go.


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